Housing: Bubble or Boom?
Great Debate, or talking past each other?House price debate a welter of confusing statsPrices high relative to incomes?Or prices reflect supply & demand?Each side supports case with selective statisticsMy approach: Housing a side-issueMain issue: whats driving the economyHouse prices a symptom of thisEconomic growth debt-dependentDebt-induced downturn caused GFCHousing market main target of Ponzi LendingAustralia avoided crisis by piling on yet more debtHousing will suffer fate of debt-dependent economy
The global debt bubbleGlobal economy carrying more debt than ever before:
The global debt bubbleDitto Australia: lower debt than USA, but same pattern:
Whats wrong with debt?Debt for productive purposes goodWorking capital for firmsLoans for new technology, factories, marketsBut debt for speculation on asset pricesDrives up asset pricesPositive feedback loop between debt & priceDoesnt add to capacity of economy to service debtsIf debt high relative to GDP, change in debt dominates economyCrash inevitable when debt stops growingAbove ignored by conventional neoclassical economicsMain explanation of Great Depression by mavericks Irving Fisher & Hyman Minsky
Whats wrong with debt?Aggregate Demand equals GDP plus the change in debtDebt-based demand & unemployment in Great Depression:Reduction in debt made the Great Depression Great
Whats wrong with debt?Change in debt explains 77% of 1930s unemployment:
Whats wrong with debt?Same factor only just begun today:
What about Australia?Half US private debt levelsBenefit from ChinaHuge government stimulus (10% increase in household income during recession)BUTSame deleveraging processes afoot here:HOWEVERDeleveraging reversed by First Home Owners Boost
House prices & mortgage debtFHVB definitely boosted house pricesWorked because reversed fall in mortgage debt to GDP
What about Australia?Mortgage debt trend reversed by The BoostAustralia increasing private debt while USA deleversHair of the Dog cure for a hangover?
What about Australia?Fastest turnaround in debt everBut only mortgage debt risingIs this sustainable? 5-fold increase in mortgage debt in 20 years
House prices & mortgage debtAim of House price speculation is unearned incomeSources of unearned income areSomeone elses incomeIncreased debtIf everyone tries to do itEither offshore income (Chinese buyers?) orIncreased debtHouse prices rise so long as debt rises fasterReal problem with economy is it is debt dependentContinued prosperity now dependent on ever-rising debt
House prices & mortgage debtIts worked so farBut can debt keep rising forever?In our debt-dependent economy, it has to if we are to avoid recession
The real problem with DeleveragingHypothetical economy Year 0GDP $1 trillion, growing at 10% p.a.Debt $1.25 trillion at start of yearIncrease in debt in $250 billionTotal spending on all markets: $1.25 trillionHypothetical economy Year 1GDP $1.1 trillionIncrease in debt zeroTotal spending on all markets $1.1 trillion$150 billion fall in demand because debt stabilisesMarkets must take a hit from fall in turnoverSimilar but smaller effect even if debt grows 10%No growth in nominal demandrise in unemployment
The real problem with DeleveragingProblem with large debt isnt just servicing itWhen debtGrows faster than economy for many yearsBecomes much larger than GDPThen debt has to keep growing faster than GDP to sustain economyServicing crisis inevitableThen slowdown in debt growth causes recessionTurnaround in debt causes DepressionDeleveraging delayed by government policy here to dateWhen it hits, all markets will sufferincluding housingFor more information, see www.debtdeflation.com/blogs